It's clear that the Consumer Financial Protection Bureau has targeted marketing services agreements, but its crackdown on some alleged kickback schemes and failure to take action after other investigations has created confusion in the mortgage industry.
For example, the agency sent a letter in June to American Home Shield, which offers warranties to homeowners, saying it would not pursue an enforcement action against the company after checking for violations of the anti-kickback provision of the Real Estate Settlement Procedures Act. The outcome of the probe, which lasted more than a year, was disclosed in its parent company's second-quarter earnings press release.
There have been other cases in which the bureau has opted against enforcement actions, said Marx Sterbcow, an attorney with Sterbcow Law Group in New Orleans.
"They say all MSAs are illegal. How can they all be illegal when you let all of these other companies off with no penalties, no fines?" he said.
The lack of enforcement action in some cases may mean CFPB will tolerate some MSAs, said Sterbcow, who in December 2013 began sounding the warning that CFPB was looking at MSAs.
The bureau declined to discuss the matter. "The CFPB does not share information about pending investigations or investigations that have closed without action," spokesman Sam Gilford responded in an email when asked about how many times has CFPB has concluded one of these investigations without punishing the target.
To be sure, the CFPB has taken strong public actions in other cases over the past year:
- Last September it fined Lighthouse Title $200,000 over referrals derived from MSAs.
- Then in January it asked a judge to penalize Wells Fargo ($35 million) and JPMorgan Chase ($900,000) for what it alleged were illegal kickbacks received from Genuine Title for the referral of business. That order has since been finalized.
- In February it fined NewDay Financial $2 million over a marketing agreement the lender had with a veterans group.
- And in June CFPB Director Richard Cordray overruled an administrative law judge and fined PHH $109 million for a violation of the antikickback provision involving mortgage reinsurance agreements.
Such actions have led Wells Fargo Home Mortgage, Prospect Mortgage and PHH Mortgage to announce they were abandoning MSAs. Mid America Mortgage is also winding down its MSAs.
In its second-quarter conference call, PHH Chief Executive Glen Messina said that the company believed its MSAs "have been structured in compliance with all applicable laws and regulations. However, as a result of increasing uncertainty surrounding regulatory oversight of these types of arrangements, PHH has been exiting its MSAs."
(There is an exception. PHH is keeping its joint venture with Realogy.)
Messina added that for the last 12 months, PHH's mortgage production from all active MSAs has been less than 2% of its overall volume. Over that time frame, PHH closed on $40.7 billion of loans.
Wells Fargo has said ending the MSAs would not have a material impact on its volume. Prospect has not commented on the expected impact on its business.
Yet many mortgage industry participants may have overinterpreted the CFPB's position, one expert said.
"There is nothing in the Lighthouse consent order, PHH decision or the CFPB's [comments] to the press that says that MSAs are per se illegal," said Phillip Schulman, an attorney with K&L Gates in Washington. "Rather, the CFPB says that companies engaged in MSAs should carefully consider whether their business practices comply with RESPA and that's certainly sound advice."
The National Association of Realtors last year created a best practices list for members entering into MSAs. And a statement this month from the trade group called on the CFPB to accept "these and other best practices to ensure that those who have complied with RESPA do not face frivolous lawsuits and other unnecessary burdens."
"To the extent that the recent CFPB decision against PHH creates doubt or confusion regarding the legality of MSAs in general, NAR will continue seeking clarification that provides certainty and guidance that can be relied upon by our members," the statement said.
Rajesh Bhat, the CEO of San Francisco-based marketing technology firm Roostify, believes the move away from MSAs will actually benefit the larger lenders. "They can differentiate themselves [to referral sources] on more than just marketing services agreements with their clout, with their ability to deliver and fund a lot more quickly than a lot of other originators."
Sue Woodard, a longtime mortgage industry top producer and sales trainer, is a fan of co-branded marketing with referral partners. She is currently the president and CEO of Vantage Production in Red Bank, N.J., a sales and marketing compliance company.
There are systems out there like the one offered by Vantage Production that allow for these arrangements to be properly billed and collected, she said.
"People have to be doing co-branded marketing but they have to be doing it the right way because I do think we are going to see enforcement step up. And I'm looking forward to it frankly," Woodard said.